Fun Centers Confront Powerful Competition

Marcus Webb

U.S.A. - America's entertainment pie (the total amount of money spent on fun) is growing. But that pie is being sliced into ever-smaller pieces, as the number of entertainment options and competitors keep growing. The likely impact on the fun center market could be dramatic. In the near future, today's relatively stable fun center niche will face a new round of consolidation. Surviving operators may have to make do with still-thinner profit margins, even while the total universe of leisure dollars and locations expands.

For this report, VT interviewed several leading experts on the fun center market. These sources say that a new wave of entrepreneurs (many of them freshly laid off by corporate America) is now seeking to open a new round of fun centers. At the same time, a growing number of existing, non-amusement facilities , from zoos to health clubs , are adding entertainment attractions to their mixes. Both of these trends are expected to continue or even increase.

Consultant and site planner Randy White of White Hutchinson Leisure & Learning Group (Kansas City, MO) told VT: "Starting now and in the next few years, several factors will drive growth in the traditional fun center industry and also growth in the broader leisure destination field. First, since the stock market crash, there is a lot of investment capital that is looking for alternative investments. Second, with many Kmarts and other facilities closing, lots of cheap real estate is becoming available. Third, many layoffs in the corporate work force have occurred, and some of these people are thinking of entering the fun center business. Our inquiries have quadrupled in the last six months. We get three and four a day, and they are serious people who understand that it requires $3-$4 million to start."

"As a result," White said, "some of the traditional fun centers are losing market share, even though the entertainment dollars are still out there. If anything, the amount of money that consumers are spending on entertainment is increasing. But the amount of leisure time seems to be shrinking. All of this means competition for those dollars is tight, and will get tighter."

George Smith, vice-president of new business development for Namco CyberTainment (Bensenville, IL) confirmed a surge of potential entrants into the fun center market. "We've seen a real acceleration of people trying to get into this business in the last six to 12 months," he noted. "Why? Because these days, so many other segments of the economy look so bad. At least our industry looks like fun!"

Harold Skripsky, chairman of Leisure Entertainment Trade Shows (the umbrella group of three associations , AAMA, AMOA and IALEI , jointly owns Fun Expo), concurs that competition is growing. "There are still a fair number of entrepreneurs who want to enter the FEC operations business, which is always a good sign," he told VT last fall. "Believe it or not, there are still more than a few new operators who want to get into the business.

The same trend was identified by Jack Cohen, president of the International Association for the Leisure and Entertainment Industry (Safari Sam's, Cranberry Township, PA). "If we look at our economy today, many big businesses are closing and the people who used to be middle and upper management are looking for opportunities. Many of these new players are looking at family entertainment as a promising market."

The better-run fun centers appear relatively safe today, if only for the moment. Experts agree the existing core of professionally run kiddie emporiums, family entertainment centers, and location-based entertainment chains are enjoying a stable market. From the rock-solid revenues of Chuck E. Cheese's, to the struggling but still-popular Dave & Buster's chain , and everything in between , today's operators have largely survived a years-long wave of consolidation, found winning strategies, and carved out a sustainable market share.

FLAT RESULTS

Yet some experts say that stability is uncomfortably close to stasis. IALEI's Cohen asserted that today's soft economy means operators will face no-growth earnings unless they take the initiative to continually add new attractions. He commented, "If we remain at par as we are now, we'll get what we have now: flat results."

George McAuliffe of Pinnacle Entertainment Group (St. Louis, MO) said today's fun center market is characterized by "stability in established facilities" following several years of shakeouts. "A core of successful operations remains. They are doing very well and are upbeat," he said. "This is an industry of niches and some are doing well and others are not doing as well."

"Local, community-based operators are doing great," agreed White. "We're working with clients who are opening new centers or expanding. Then you've got the chains. As with any industry, those who perform well, earn well. Those who don't perform well are closed or they are acquired by companies with better management."

Namco's Smith gave this careful assessment of today's status quo: "For the market as a whole, I think we are seeing ongoing shrinkage in terms of gross revenues. Yes, there are fun center operators making money. For the last few years, most arcade operators have survived by depending largely on their installed bases of equipment. But if there is relatively little good new equipment available , which is the case today , that means you can't enter the business with new investments. The edge goes to the guy with a large base of used equipment. So there is a barrier to entry. Meanwhile, profit margins in the leisure facility market have now become so compressed that some very large corporate players are exiting the business."

Smith, Cohen, White, Skripsky and McAuliffe agreed that today's fun centers are challenged by a paucity of dynamic, high-earning, affordable equipment. Skripsky added that overpriced machines only fueled the trend of operator sales resistance, which he said was at an "all time high."

Local area network arcades or public PC game rooms are a much-discussed trend today's fun center market. But most of the experts consulted by VT expressed skepticism that PC game centers will become the dominant trend. "The at-home entertainment market has hurt the leisure facilities industry, but I don't think it's true that the PC game room will put traditional arcades out of business," said Cohen. "Kids are already doing the same thing at home. Every kid from age 15 and up has computers."

McAuliffe takes a somewhat more positive view of PC game rooms. "We're opening one with a client this month," he said. "We have researched the LAN niche for two years and think it holds some definite promise." But he cautioned: "We are plugging LAN equipment into an existing coin-op fun center as just one component among many, and that's how I think it will succeed , not on a stand alone basis."

What, then, is the broad future for the fun centers of America? According to IALEI president Cohen, the destiny of arcade operators lies squarely in their own hands. "I think people are looking for unique ways to entertain themselves and that's why action sports like paintball, skate parks, and indoor wall climbing work well for a growing number of U.S. leisure sites," he said. "Change is a constant. The way to create growth is to offer new attractions. That's why, even though I'm concerned about the larger economy, I think the fun center market has potential to grow this year and beyond."

"We're definitely in a growth market for leisure time and dollars," said Randy White. "The challenge for industry professionals is to recognize the changes and catch up! Operators must specialize in a particular niche within the leisure spectrum, but they also must pay attention to what is happening beyond their niches. Who else is competing for your demographic? The answer is, every other public destination, whether its core focus is amusements or not."

Smith sees this ahead: "A point will be reached in the next couple of years where the trends (of the need for new investment and economies of scale) converge, making consolidation and market forces work much more quickly. The strong will get stronger and the sick will disappear even faster. You'll see a rebound of profitability for the survivors, who will be in a stronger position to take advantage of any new technologies that may come along to create the next boom."

Skripsky summarized: "We have gone through an evolutionary process (of boom followed by shakeout in the fun center market) but I think we've largely gone through the worst of it'I believe the industry is beginning to show some modest improvements and will probably continue to improve. Will it ever be like it was a decade ago? Probably not. But it will unquestionably survive and it will be healthy."